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Dividend Growth Watchlist Criteria
The companies listed on this watchlist are stable with a track record of raising their dividends consistently. The company must also have a “Wide” economic moat, according to Morningstar. This ensures a company I consider for investment has a sustainable competitive advantage for the foreseeable future. An S&P Capital IQ Earnings and Dividend Ranking of A or A+ helps to establish the company has achieved and should continue to achieve lower price volatility when compared to the broader market.
Next, since this is a dividend growth watchlist, it would logically make sense to measure a company’s dividend growth. In this case, a company needs to have a 10-year dividend growth rate of 10% or greater to ensure growth in the dividend itself, in addition to being a quality company. The company should have room to grow their dividend too, so a payout ratio of 50% or less is used as the final filter.
I use the dividend yield theory to determine if a stock is potentially overvalued or undervalued. This idea suggests a company’s yield will revert to the norm over time. An example below is BlackRock Inc. (BLK) – the current yield is 2.54% while its five-year average is just 2.29%. The difference being 25 basis points or about 11%, which suggests it could be undervalued.
| Company | 10 Year DGR | Dividend Yield (4/1/22) | Div. Yield(5 Yr Avg.) | Overvalued/ Undervalued |
| Accenture plc (ACN) | 14.61% | 1.14% | 1.46% | 22% |
| Applied Materials Inc. (AMAT) | 11.49% | 0.82% | 1.22% | 33% |
| Bank of New York Mellon Corp. (BK) | 10.48% | 2.75% | 2.26% | -22% |
| BlackRock Inc (BLK) | 11.63% | 2.54% | 2.29% | -11% |
| Comcast Corp. (CMCSA) | 16.09% | 2.26% | 1.88% | -20% |
| Costco Wholesale Corp. (COST) | 12.50% | 0.55% | 0.85% | 35% |
| Ecolab Inc. (ECL) | 10.23% | 1.13% | 0.97% | -16% |
| Graco Inc. (GGG) | 10.10% | 1.19% | 1.09% | -9% |
| Home Depot Inc. (HD) | 20.30% | 2.52% | 2.07% | -22% |
| Jack Henry & Associates Inc. (JKHY) | 16.10% | 0.98% | 1.06% | 8% |
| Lockheed Martin Corp. (LMT) | 12.55% | 2.51% | 2.70% | 7% |
| Lowe’s Companies Inc. (LOW) | 18.11% | 1.58% | 1.53% | -3% |
| Mastercard Inc. (MA) | 40.16% | 0.54% | 0.50% | -8% |
| Northrop Grumman Corp. (NOC) | 12.08% | 1.38% | 1.63% | 15% |
| Roper Technologies Inc. (ROP) | 17.01% | 0.52% | 0.52% | 0% |
| Sherwin-Williams Co. (SHW) | 16.28% | 0.94% | 0.77% | -22% |
| Thermo Fisher Scientific Inc. (TMO) | 22.63% | 0.20% | 0.23% | 13% |
| T. Rowe Price Group Inc. (TROW) | 13.29% | 3.14% | 2.46% | -28% |
| U.S. Bancorp (USB) | 13.15% | 3.48% | 2.83% | -23% |
| Visa Inc. (V) | 23.91% | 0.66% | 0.59% | -12% |
Goal
The goal of my dividend growth watchlist is to discover companies to add to my dividend growth portfolio in an attempt to consistently exceed the market return of the Vanguard Dividend Appreciation ETF (VIG). Through March of this year, an equally weighted portfolio of these 20 stocks mentioned above would have underperformed VIG by 3.12%. VIG has lost 5.18% during the first three months of 2022, while the stocks above lost 8.30%.
| Symbol | MarchReturns | YTD Return Through March |
| ACN | 6.71% | -18.44% |
| AMAT | -1.79% | -16.09% |
| BK | -6.62% | -14.05% |
| BLK | 3.45% | -15.95% |
| CMCSA | 0.13% | -6.51% |
| COST | 10.90% | 1.59% |
| ECL | 0.48% | -24.50% |
| GGG | -3.29% | -13.28% |
| HD | -4.66% | -27.44% |
| JKHY | 11.75% | 18.32% |
| LMT | 1.75% | 25.00% |
| LOW | -8.54% | -21.51% |
| MA | -0.95% | -0.41% |
| NOC | 1.15% | 15.98% |
| ROP | 5.36% | -3.86% |
| SHW | -5.13% | -28.96% |
| TMO | 8.63% | -11.43% |
| TROW | 5.50% | -22.44% |
| USB | -5.21% | -4.59% |
| V | 2.61% | 2.51% |
| VIG | 3.02% | -5.18% |
New Option
The Sherwin-Williams Company appeared on the watchlist for the first time this year and is currently undervalued by about 22% based on dividend yield theory. SHW has performed the worst of any stock on the watchlist so far this year down nearly 29%. Sherwin Williams sports a 10 year dividend growth rate of 16.28%, so it was surprising to see the company announced a 9.1% dividend increase in February of this year, well below its 10 year average.
Final Thoughts
This dividend growth watchlist is used to identify companies worthy of further research. Stock prices fluctuate continuously, and although there are legitimate reasons for a price increase or decrease, occasionally there are times the market is just overreacting to a short-term issue. I believe if you can identify the reason(s) and determine for yourself if a decline in stock price is justified, you can minimize risk in your portfolio by purchasing a company’s stock when their yield is higher than average.
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